Pay transparency: The EU directive creates a considerable need for implementation

Pay transparency and effective enforcement mechanisms

The principle of equal pay for men and women for equal work or work of equal value has been enshrined in European law since 1957. In 2017, the German legislator transposed the EU Equal Treatment Directive (Directive 2006/54/EC) into national law and created a legal basis to strengthen equal pay with the EntgTranspG. While it was previously primarily the responsibility of employees to discover any inequalities in pay through a right to information (Sections 10 - 16 EntgTranspG), a shift is now taking place. The EntgTranspRL places a greater obligation on employers to establish adequate pay structures within the company and to monitor and actively adapt these on an ongoing basis. These measures are supported by a range of sanctions. In addition, the rights of employees and employee representatives are considerably extended.

Pay transparency prior to the start of employment

Duty to inform

In future, the obligations relating to transparency on pay will apply even before the start of employment. Employers will now be obliged to provide job applicants with information on the (starting) salary for the respective position or its range and, if applicable, on the relevant provisions of an applicable collective agreement (Art. 5 (1) EntgTranspRL). This will apply to all employers, regardless of the number of employees and any request for information from the applicant.

The definition of “Remuneration" within the meaning of the Transparency Directive is not only basic salary, but also all other components that an employer pays to an employee directly or indirectly (supplementary or variable components) as a cash or non-cash benefit on the basis of the employment relationship (Art. 3 (1)(a) EntgTranspRL). It includes all elements of remuneration payable by law, collective agreement and/or according to the practice in the individual Member State (see Recital 21).

The information must be provided in good time so that the applicant has the opportunity to conduct well-founded and transparent salary negotiations before entering into the employment contract. For example, the information could be included in a published job advertisement or before the interview. However, the exact time at which the information is to be provided is not set out in the Transparency Directive and the Transparency Directive does not provide any indication of a minimum period of time. However, the Pay Transparency Directive is not intended to restrict the negotiating power of the parties, as the parties are free to agree a salary outside the range specified by the employer. 

Employers should also note that, where necessary, the information must be provided in a format that is accessible to persons with disabilities and takes into account their specific needs, for example through an understandable and perceptible means, appropriate font size or other formats appropriate to their disability (Art. 8 EntgTranspRL, Recital 37).

Non-discriminatory recruitment procedures

Employers are obliged to ensure that job advertisements and job titles remain gender-neutral and to conduct the recruitment process in a non-discriminatory manner (Art. 5 (3) EntgTranspRL). However, the provision does not provide further details regarding these obligations. A discriminatory procedure could arise for example, through incorrectly drafted advertisements, inadmissible questions, an inappropriate interview, discriminatory scheduling of interviews, discriminatory evaluation of the application, discriminatory assessment of qualifications or a lack of compliance with protective regulations.

During the recruitment process, employers are prohibited from asking applicants about their current or previous pay (Art. 5 (2) EntgTranspRL). Employers are also not permitted to proactively attempt to obtain information about this, possibly by other means (see Recital 33). However, applicants are free to bring their current or previous salary to the salary negotiations.

Use of third parties in the recruitment process

If employers involve third parties (for example, headhunters, or a personnel service provider) in the recruitment process, the employer may also be liable for any discriminatory behaviour of these third parties. Service providers used should therefore be instructed accordingly to refrain from any form of discriminatory behaviour. 

Annual obligation to provide information on remuneration criteria

During the employment relationship, Art. 6 (1) EntgeltTranspRL stipulates that employers must inform their employees, without being asked, of the criteria used to determine their pay, pay levels and pay trends. These criteria must be objective and gender-neutral and may include competencies, workloads, responsibilities, working conditions and any other factors relevant to the specific job or position (Art. 4 (4) EntgeltTranspRL). The form in which the information is to be provided is not regulated in the Transparency Directive. Art. 6 (1) EntgeltTranspRL only stipulates that this must be done "in an easily accessible manner". 

The German EntgTranspG previously only granted employees a right to information where the company had more than 200 employees. The Transparency Directive, on the other hand, obliges all employers regardless of the size of the company to provide this information. It remains to be seen to what extent Member States will make use of the option to exempt employers with fewer than 50 employees from the obligation to provide information when transposing the Transparency Directive into national law.

Additional individual right to information for employees

In addition, the Transparency Directive grants employees an individual right to information (Art. 7 (1) EntgTranspRL). Accordingly, the employer must, at the request of the employee, provide written information on their individual pay levels and on average pay levels, broken down by gender and for the groups of employees who perform the same work or work of equal value. Employees also have the option of requesting the information via employee representatives or an equal treatment body (Art. 7 (2) ntgTranspRL). This is intended to protect employees and take into account any concern of victimisation when applying the principle of equal pay (see recital 24). The provision is similar to the existing individual right to information (Sections 10 et seq. EntgTranspG) with the difference being that it is not the statistical median that is used as a comparative salary, but the average salary level.

If the information provided is inaccurate or incomplete, the employee may request additional and appropriate clarification and details of the data provided and receive a reasoned response, either in person or via the employee representative body (Art. 7 (2) sentence 2 EntgeltTranspRL). Employers must provide the requested information within two months of the date of the request at the latest (Art. 7 (4) EntgTranspRL). Employers must inform employees annually of their right to information and the steps necessary to exercise it in accordance with Art. 7 (3) EntgTranspRL. Employers are free to provide the information on their own initiative (see Recital 36).

Furthermore, employees must not be prevented from disclosing their pay in order to enforce the principle of equal pay. Any provisions in (labour) contract conditions are to be prohibited by Member States (Art. 7 (5) EntgTranspRL). However, employers can demand that the information received by employees following a request for information, which does not relate to the employee's own pay or pay level, is only used to exercise the right to equal pay (Art. 7 (6) EntgTranspRL).

Company reporting on the gender pay gap

The Transparency Directive also introduces further reporting obligations for employers. As part of the reporting obligations the employer must collect data on seven specifically named pay-related indicators. This includes information on (a) the gender pay gap, (b) the gender pay gap for supplementary or variable components, (c) the average gender pay gap, (d) the average gender pay gap for supplementary or variable components, (e) the proportion of employees (f) the proportion of employees in each pay quartile and (g) the gender pay gap between employees in groups of employees, broken down by normal basic pay or salary and by supplementary or variable components (Art. 9 (1) EntgTranspRL).

According to Sec. 21 (1) EntgTranspG, comparable requirements previously only applied to private employers with more than 500 employees who are obliged to prepare a management report in accordance with Sections 264 and 289 German Commercial Code (Handelsgesetzbuch – HGB). The new reporting obligations will be introduced on a staggered basis and with specific reporting deadlines for employers with more than 100 employees.

Employers must submit the information to a monitoring body designated by each Member State and also have the option of making the information public on their company website or in another way (Art. 9 (7) EntgeltTranspRL). Employers must also make the information on the gender pay gap available to their employees and employee representatives, as well as to the labour inspectorate and the equality body on request (Art. 9 (9) EntgeltTranspRL).

Procedure for joint remuneration assessment

If the gender pay gap report identifies a pay gap of more than five per cent, which the employer cannot justify using objective, gender-neutral criteria and correct within six months, a joint pay assessment must be carried out by the employer and the employee representatives in accordance with a defined procedure (Art. 10 (1) EntgeltTranspRL). This assessment requires, among other things, the existing pay situation should be analysed and measures taken to eliminate pay differences (Art. 10 (2) EntgeltTranspRL). If there are no employee representatives, they should be appointed by the employees for the purpose of the joint pay assessment (Recital 43).

The joint pay assessments must then be made available to the employees and employee representatives and communicated to a monitoring body to be set up. The pay assessment must also be made available to the labour inspectorate and the equality body on request (Art. 10 (3) EntgeltTranspRL).

In case of violation claim for damages or compensation

Employees who suffer damage as a result of a breach of their rights or obligations in connection with the principle of equal pay should be able to claim and receive compensation for this damage (Art. 16 EntgeltTranspRL). Member States must create suitable regulations for this purpose.

Compensation for damages should include payment for lost remuneration (including associated bonuses or benefits in kind), compensation for lost opportunities, non-material damage and other relevant damage that can sometimes result from a combination of several grounds of discrimination (intersectional discrimination) as well as interest on arrears (Art. 16 (3) sentence 2 EntgTranspRL). In contrast to violations of the German General Act on Equal Treatment (Allgemeines Gleichbehandlungsgesetz – AGG), these damages may not be capped (Art. 16 (4) EntgTranspRL). For the first time, state recommendations and coercive measures, in particular the threat of a penalty payment (Art. 17 Transparency Directive), as well as effective sanction mechanisms (Art. 23 EntgeltTranspRL), such as fines, are also provided for.

Reversal of the burden of proof

Currently, if employees can demonstrate the existence of direct or indirect pay discrimination, the onus is on the employer to prove that there is no such discrimination (Section 22 AGG) in conjunction with Sec. 2 (2) sentence 1 EntgTranspG). In future, Member States will have to ensure that employers must prove that there is no discrimination in equal pay claims even if they do not fulfil their transparency obligations (Art. 5, 6, 7, 9 and 10 EntgeltTranspRL) (Art. 18 (2)(1) EntgeltTranspRL). The situation is different if the employer can prove that the violation was obviously unintentional and minor (Art. 18 (2)(2) EntgeltTranspRL). This burden of proof provision in Section 15 (5) sentence 1 EntgTranspG only relates to the employer's failure to fulfil its duty to provide information.

Compliance in practice

The principle of equal pay is already enshrined in law and the Transparency Directive does not have to be transposed into German law until 7 June 2026 at the latest. However, due to the extent of the new obligations, employers should consider at an early stage to what extent they fall within the scope of the Directive and what obligations they will be subject to. In particular, remuneration structures, including any special remuneration components, should be evaluated and the necessary comparative grouping should be considered. 

Furthermore, the participation rights of the works council, which has a right of co-determination in the structuring of remuneration in accordance with Sec. 87 (1) No. 10 German Works Constitution Act (Betriebsverfassungsgesetz – BetrVG), must be observed. Companies without co-determination could draw up a catalogue of criteria in the form of a remuneration policy to specify the remuneration regulations.

Unresolved legal issues are likely to arise in the case of international groups whose German subsidiaries are not authorised to determine remuneration-relevant principles. The same applies in cases where variable remuneration is regulated and paid by the parent company, which is not based in Germany, as part of standardised international remuneration systems. 

Conclusion

The Transparency Directive and its transposition into German law means additional obligations and a considerable amount of extra bureaucracy for employers. If the company's remuneration policy is to continue to be based on entrepreneurial principles in the future, it must be possible to explain salary determination transparently and justify any differences (in a court of law).